Does Changzhou Qianhong BiopharmaLTD (SZSE:002550) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Changzhou Qianhong Biopharma CO.,LTD (SZSE:002550) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Changzhou Qianhong BiopharmaLTD

What Is Changzhou Qianhong BiopharmaLTD's Debt?

As you can see below, Changzhou Qianhong BiopharmaLTD had CN¥20.0m of debt at September 2023, down from CN¥103.0m a year prior. However, its balance sheet shows it holds CN¥502.8m in cash, so it actually has CN¥482.8m net cash.

A Look At Changzhou Qianhong BiopharmaLTD's Liabilities

We can see from the most recent balance sheet that Changzhou Qianhong BiopharmaLTD had liabilities of CN¥171.2m falling due within a year, and liabilities of CN¥87.8m due beyond that. Offsetting this, it had CN¥502.8m in cash and CN¥318.8m in receivables that were due within 12 months. So it can boast CN¥562.6m more liquid assets than total liabilities.

This surplus suggests that Changzhou Qianhong BiopharmaLTD has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Changzhou Qianhong BiopharmaLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Changzhou Qianhong BiopharmaLTD grew its EBIT by 140% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Changzhou Qianhong BiopharmaLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Changzhou Qianhong BiopharmaLTD has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Changzhou Qianhong BiopharmaLTD's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Changzhou Qianhong BiopharmaLTD has net cash of CN¥482.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 140% over the last year. So is Changzhou Qianhong BiopharmaLTD's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Changzhou Qianhong BiopharmaLTD you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.